Chapter 3

The Accounting Information System and the Accounting Cycle

LEARNING OBJECTIVES

Chart of Accounts JOURNAL ENTRIES! T-ACCOUNTS!-Post transactions

Prepare a Trial Balance Understand Accounting Cycle

Now that weve analyzed the effect transactions have on the Accounting Equation
We need to standardize the format
Each transaction must be recorded in a manner that:
o o

Is recognizable by General Ledger Software

Can be interpreted efficiently by accounting professionals

Accurately reflects the economic activity

Are you left-handed?

If I ask a class how many people are left-handed

Invariably, several people raise their left hands!

Why did these folks raise their left hands?

Because thats how their brains are wired!

Thats their dominant side.

Lets play some basketball

If these same left-handed people were playing basketball.

Wed expect them to dribble with their left hands.

Go up the court on the left side..

And have their strong shot on the left.

Lets play some Defense.

How would we defend against these left-handed players?

Wed force them to the right!

What does Basketball have to do with Accounting?

Assets are left-handed! Thats no surprise.they dominate the left-hand side of the Accounting Equation.

They have the home court advantage Assets on the left-hand side.
Home Away

The Accounting word for left is

DEBIT!
Assets are debit-handed
They are dominant on the left

And weak on the right

Assets are strong on the left

Assets
Strong on Left Weak on Right

Dominant

Assets

Logical, isnt it?

Assets

So, if Assets

Are on the left-hand side of the equation

And increase on the left How would you expect Liabilities and Equity to behave?

Liabilities and Equity are strong on the Right

And weak on the left Thats no surprise.they dominate the right-hand side of the Accounting Equation.

They have the home court advantage Liabilities and Equity on the right-hand side.
Away Home

The Accounting word for right is

CREDIT!
Liabilities and Equity are credit-handed They are dominant on the right And weak on the left

Liabilities and Equity are strong on the right

Liabilities and Equity
Weak on Left Strong on Right Dominant

Liabilities and Equity

Lets take a closer look at Equity

Stockholders Equity
Contributed Capital

Expenses

Dividends

Income Statement

Statement of Stockholders Equity

Revenues

Heres a trick to help you remember the four components of equity.

Think of the Owner going for a R I D E
Revenues
Investments Dividends Expenses
Increase Equity

Decrease Equity

Stockholders RIDE!
Stockholders Equity
Expenses Dividends

Investment

Income Statement

Statement of Stockholders Equity

Revenues

An items location in the accounting equation determines its STRONG side

Assets

Liabilities

Equities

The left-hand side of the equation goes up on the left; the right-hand side of the equation goes up on the right!

Assets
Decrease with Debits Decrease with Credits

Liabilities

Contributed Capital
+ with Credits

Increase with Credits

Increase with debits

RIDE!
Retained Earnings
- With Dividends - With Expenses
+ with Revenues

Armed with this knowledge of

Debits and Credits, were ready to start into the Accounting Cycle.
The Accounting Cycle begins with the analysis of transactions, and Ends with a Post-Closing Trial Balance.

The Accounting Cycle

In this Chapter, well cover Steps 1 through 3

Quality Web Designs

This example is found on page 110 in your text.

For each transaction, we will: Analyze the impact on the accounting equation

Apply the rules for Debits and Credits

Prepare the journal entry Post the Entry to the T accounts.

Transaction 1)

Post the transaction to the T accounts

Transaction 2)

Post the transaction to the T accounts

Transaction 3)

Post the transaction to the T accounts

Transaction 4)

Post the transaction to the T accounts

Transaction 5)

Post the transaction to the T accounts

Transaction 6)

Post the transaction to the T accounts

Transaction 7)

Post the transaction to the T accounts

Transaction 8)

Post the transaction to the T accounts

The Ending Balance from Each of the T accounts

Is listed on the Trial Balance, in order of liquidity
Total Debits = Total Credits

Revenue and Expense balances are recorded on the income statement

Net Income is transferred to the Statement of Retained Earnings

Net Income and Dividends are reported on the Statement of Retained Earnings

From Income Statement

To Balance Sheet

Assets, Liabilities and the Ending Balance from the Statement of Retained Earnings are reported on the Balance Sheet

From Statement of Retained Earnings

End Chapter 3